Vietnam’s stocks will extend Southeast Asia’s best rally as plans to ease share-ownership limits and a strengthening economy lure foreign inflows, according to Asia Frontier Capital and Coeli Asset Management.

The benchmark VN Index has climbed 11 percent in 2015 to the highest in five years relative to the MSCI Southeast Asia Index, which has tumbled 12 percent. Even after the gains, the Vietnamese gauge is valued at an 18 percent discount to the MSCI regional measure. Foreigners have bought $223.1 million of the nation’s stocks this year through Aug. 6, heading for the 10th straight annual purchase.

While plunging commodity prices and the prospect of higher U.S. interest rates hammer shares from Indonesia to Thailand, frontier fund managers are more optimistic about the outlook for Vietnam, where the economy is growing at the fastest pace in two years and the ruling Communist Party is preparing to allow foreigners to increase stakes in certain industries.

“We are generally very positive for the market,” said Thomas Hugger, chief executive officer at Hong Kong-based Asia Frontier Capital. “We continue to buy Vietnamese stocks, since we see good economic figures coming out from Vietnam and at the same time the stock market is trading at a discount.”

The Vietnamese government is targeting economic growth of 6.2 percent in 2015, up from about 6 percent last year. Inflation has stayed below 1 percent in the first five months of the year, down from a peak of more than 28 percent in August 2008.

The VN Index trades at 12 times reported earnings, versus the MSCI Southeast Asia’s 14.7 multiple. The gauge rose 0.6 percent to 607.23 as of 10:06 a.m. local time today.

Key to growth

Regulators see foreign investment as one of the keys to growing the country’s stock market, where average daily trading volume on the main Ho Chi Minh City Stock Exchange is about one-10th that of Singapore, the region’s largest bourse. Vietnam is building a case for an upgrade to emerging-market status from frontier classification by MSCI Inc., the State Securities Commission said in October.

“The liberalisation of the foreign ownership limits is a hugely significant event for the development of Vietnamese capital markets,” said James Bannan, who runs the $130 million Frontier Markets Fund at Coeli in Sweden. “The next critical step in opening up the markets is for the government to sell down its ownership interest in a large number of listed companies. Governments are rarely good owners of companies.”

Bannan said he is continuing to add Vietnam stocks and prefers companies reliant on consumer spending.

The government issued a decree on June 26 to allow overseas investors to increase holdings in certain industries to 100 percent from a current cap of 49 percent.

Drawn-out process

For Project Asia Research & Consulting Pte., foreign investors may be deterred by the drawn-out process involved in companies getting approval to raise overseas ownership limits, while the continuing existence of state stakes or cross-shareholdings means minority investor rights will be limited.

“Reforms are done at a slow pace and there is still a fear that they can get reversed if there is a downturn in the economy or the stock market,” said Attila Vajda, managing director at Project Asia Research, a Singapore-based advisory firm.

The ownership-reform plan has been delayed since it was first proposed in 2013. Across the border in China, the ruling Communist Party has gone to extreme lengths to stop a $3.4 trillion equity rout from spilling into the wider economy, including banning selling by major shareholders and curbing short sales.

Ownership caps

Under Vietnam’s decree, to take effect in September, foreign holdings in sectors such as banks that are governed by separate ownership regulations will remain limited to 30 percent. A cap of 49 percent will apply to unspecified sectors. All other equities would have no limits, unless restricted by companies themselves. Guidelines will be issued this month, Vu Bang, chairman of the State Securities Commission said Aug. 6.

The government’s steps to open up its corporate sector, coupled with youthful demographics and cheap labor, makes the nation one of the most compelling frontier markets in the region, says Shamoon Tariq, a Stockholm-based money manager at Tundra Fonder, which has $225 million in assets under management.

The relaxation of ownership limits “is one step closer to an open-market mechanism foreigners like,” said Tariq, who said he’s continuing to buy the nation’s stocks. “It should attract international investors to a considerable degree.”